Archive for September, 2008

Here is Bush speech on Wednesday night (24 September) to get the $700 billion bail out in contrast with what he said on July 15 2008 when he said that everything was fine, that productivity was growing, that people are working (”not as good as we’d like but . . .”), etc. Two months ago he was exciting hope in the midst of panic. Now we have the excitement of fear in the midst of meltdown. Almost like at the time of September 11, we are hushed into accepting a massive cost in view of avoiding a greater one, the fall from middle class status (weather real or ideal). Here is the naked emperor: “the top economic experts warn that if not immediate action is taken” we’ll have “financial panic and distressing scenarios” . . .”more banks would fail including one in YOUR community. The sock market would drop even more, which would reduce the value of YOUR retirement account, the value of YOUR home could plummet, foreclosures would rise dramatically, and if you are a business or a farm YOU would find it harder and more expensive to get credit, more business would close their doors, and millions of americans could loose their jobs”

But you may think that this would not touch you, as you credit rating is fine . .ah ah, “even if you have good credit history it would be more difficult for YOU to get a loan you need to buy a car or send your children to college, and ultimately our country could experience a long and painful recession. Fellow citizens, WE must not let this happen.”

As a “long and painful recession” will happen anyway (many are predicting a min of 18 months recession which has already started) this call for action with the consequent bailing out of wall street with a blank check is obviously going to be defended in the future as “if we had not done that we would be experiencing a worst recession.” But the emperor IS naked in this moment of crisis. Part of the US ruling classes are stirring this towards creating a context for near future restructuring and cuts. The public purse will be burdened with debt over Iraq and the bailout and a furthering of privatisation of public services etc, will be on the agenda. And this agenda is fine with the democrats, who are ready to accept a deal with few cosmetic limits to executive pay. What is interesting is that it is the republicans, concerned that the bailout is a step towards “socialism”, that are dragging their feet (see this article in the International Herald Tribune). What’s stewing?

Paulson’s argument for keeping his $700b bailout programme a free gift to his old Wall Street mates is that it is designed to attract private partners who would be discouraged if too many caveats are put into place: see here

check also Naomi Klein’s interview on democracy now . . . .when it was run by Paulson, Goldman & Sacks increased debt exposure enormously, hence today’s bail out goes to safe his old colleagues ‘ass

check this: presidential debate suspended, general states called, bipartisan consensus seeked to frame $700b plan . . .we might be in the midst of a process to generate a new kind of consensus which will set the framework for policies for the next few decades.

also, from Naomi’s bulletin the news that Gingrich is holding an event this Saturday, September 27 that will be broadcast on satellite television to shore up public support for new controversial policies. . . .

here is the breakdown of different take and resistance around Paulson from RGE monitor site:

◦ In its original version, Treasury requests the right to buy anything from any institution (incl. hedge funds) at theoretically any price it deems right without oversight or legal recourse. Management of assets will be outsourced to the private sector. Authority expires Sep 2010. By order of magnitude, the entire shadow banking system incl. brokers and hedge funds is $10 trillion of which $5 trillion are buried in off-balance sheet vehicles.–> House Republicans warn Treasury Secretary Henry Paulson on Sep 24 that his $700 billion financial rescue plan wouldn’t pass and ask for more time to consider alternative ideas.
◦ Ben Bernanke proposes ‘hold-to-maturity’ purchase price instead of current market value described as ‘fire-sale’ price.
◦ Krugman: if taxpayers are to overpay for securities that other private market participants would not take at any price then an equity stake is a MUST; i.e. should be make-or-break issue in Congress.
◦ Democrats’ alternative plan includes measures on: restrictions on executive compensation, Equity stakes in return for bailout to recapitalize institutions and retain upside for taxpayers; Bankruptcy reform to lower debt value of purchased mortgages; Independent oversight of how $700bn are spent; Second stimulus package for Main Street next to bailout for Wall Street.
◦ Industry groups want to temporarily suspend mark-to-market accounting in order no to take a writedown on sold assets
◦ Tett: valuation and pricing issues prevented the first Super-SIV from working, the same might happen again. If bad asset purchase price is too low, writedowns might be too large to bear; if price is too high, taxpayer overpays and has limited upside eventually–>
◦ Geithner (via MarketWatch): The ’shadow banking system’ that needs to be re-intermediated is a $10 trillion market without adequate capital provisions (=$2.2tr commercial paper conduits incl ABCP + $2.5tr repo/reverse repo market + $4tr combined brokerage assets + $1.8tr hedge funds = $10.5tr in 2007) that boomed outside traditional banking. In comparison: the traditional banking system is also $10trillion.
◦ In July, FASB has decided to “eliminate the concept of the Qualified Special Purpose Entity (QSPE)” in the revised financial-accounting standard, FAS 140, starting November 2009. This requires banks to consolidate off-balance sheet vehicles used to package assets into securities –> Up to $5 trillion of dollars worth of illiquid assets/derivatives are buried on banks’ Variable Interest Entities (VIEs)
◦ BIS Joint Forum: CDO of ABS (i.e. structured finance CDOs), CDO^2 are not likely to survive the turmoil .
◦ SIFMA: Global issuance of CDOs from 2004 - 4Q2007 totaled $1.47 trillion. CDO issuance by underlying collateral in 2007: -$254.8bn structured finance CDOs (collateral pool consisting of RMBS, CMBS, CMOs, ABS, CDOs, CDS, and other securitized/structured products) -$148.3bn high-yield loans (rated below BBB-/Baaa3) CDOs -$78bn investment-grade bonds CDOs

Naomi was rebuked by Andrew Sullivan remarks that the problem is not shock, but there is not enough “capitalism”, where people take responsibility, taxes are on a level playing field etc. . . .it is actually quite interesting here the fact that this is the major impasse between the two, on other themes much agreements it seems.

The article above was asking: is this the end of capitalism? A specular question was asked during BBC Newsnight by Jeremy Paxman to Naomi Kleim: what is the alternative to capitalism? There is always an impasse to this question, precisely because the question requires an “ism” for an answer, and we are quite sceptical about providing these (and this is good, it means we are sensible to the fact that the “ism” comes out of our own interaction, and is not a magic formula you and I can campaign on. So, we should say: I do not know what is the alternative to capitalism, but I know what is the alternative to capital, and that is that people start to run their own affairs in common, giving values to other things than profit. For example, the alternative is that instead of giving $700 billion as a blank check to the financial capital of wall street, we let them bankrupt, buy their assets at a bargain, and start use finance as a conduit for socially and environmentally sustainable investment, predicated on social justice. Who decide what is just? well, since these financial powerhouse will be in public hand, we have to open a debate what do we mean by democracy . . .

Here is the Austrian economist position. Here the author claims the bailout will be $5 trillion. The argument is that “More formally, there is a gap between the nominal and real value of debt instruments that across the entire credit spectrum easily exceeds $5 trillion, the risk of which the federal government has assumed.” Through the bailout the federal government is providing a floor to the assets prices above the “real value” of assets (i.e. very low in these conditions). To paraphrase Marx, as soon as wall street and government put their heads together, the sacred laws of supply and demand are repealed.

Three options are given here by the Austrian economist author Don A Rich:

“First, the federal government raises taxes to pay off the difference. That clearly isn’t good news for Wall Street or the wealth-creation process.

Second, the Federal Reserve System prints enough money to prop up debt-security prices at nominal values over time, thereby bringing about equilibrium by raising the prices of everything else. A borderline hyperinflation isn’t good news for Wall Street.
Third, perhaps in some instances the federal government seizes the assets of the financial industry at fire-sale prices, and therefore inflicts the loss on shareholders and private creditors in a bizarre form of monetary-policy-induced, catastrophe-driven socialism or fascism.”

Well perhaps not, perhaps the seizure of financial assets could in principle open to a different and far more democratic use and function of finance as mentioned above.

Here Saskia Sassen’s “New new Deal”: let us spend $700 billion but in different ways (infrastructure, social services etc.). No mention about the link between fed expenditure and gov control on wall street.